Paul Sullivan: Making existing homeowners poorer is hardly an affordability strategy

By on 01/13/2020

When 26 per cent of a typical new Vancouver apartment’s cost are government taxes and fees, the solution is not more taxes.

Housing expectations ran high after our last provincial election that saw a B.C. Liberal party win, then lose, thanks to a power-sharing deal between the NDP and Greens. But one could argue the 2017 election was really won and lost over housing as the Metro Vancouver region faced a chronic shortage of homes for all budgets, especially rentals. Now, two years later as we end the decade, let’s measure whether this new government’s significant market interventions and many experimental new taxes on housing, levied with zero economic analysis of impacts, actually improved affordability for all those millennials who want similar homeownership opportunities as their parents.

Here are the metrics that matter:

Have vacancy rates improved?

They are still at less than one per cent in much of Metro Vancouver. Many rental-home builders are now choosing to build anywhere but B.C., in places like Seattle. Added to this are more draconian rent controls, which mean the rental shortage will become more acute, driving up rent prices, as our population and demand grow.

Are homes more affordable?

Trickle-down affordability has failed. While high-end detached homes have experienced declines in the 15 to 45 per cent range, entry-level home prices have remained robust as supply constraints and strong local demand overcome policy dampeners. Detached homeowners (primarily an older demographic) have been crushed by rising costs and declining equity. Homeowners rely on their equity to cover unexpected healthcare costs, repairs, support their children’s education or fund their retirement.

A recent B.C. Notaries poll in The Vancouver Sun confirmed that 90 per cent of first-time buyers are relying on the bank of mom and dad. Assuming those parents can even sell their home, they will now have a substantially smaller downpayment to gift their children as a result of these equity losses.

The widely quoted phrase: “The most terrifying words in the English language are, ‘I’m from the government. I’m here to help’” — a stark reminder that the real key to affordability is to reduce the level of government interference in the housing market.

Municipal government planners and councils must allow more diverse housing options in neighbourhoods. They must reduce municipal housing approval times that can take as long as five years, and offer incentives to builders to offset high construction and land costs, as the International Monetary Fund has recently recommended for Canada. Rather than punishing existing homeowners, or picking winners and losers, communities must embrace choices for renters to buy into the market at all budgets, from micro-suites to duplexes and non-strata rowhomes and apartments. All levels of governments own land that could be repurposed to build homes for the 94 per cent of renters or those living at home who plan to buy, in a poll reported by Bloomberg News.

Will property taxes decrease if home values go down?

While some misguided politicians have cheered equity declines in single-family homes, they ignore the fact vacancy rates haven’t budged, a shortage of supply has helped ensure purchasing a home remains out of the reach for many, and the property tax burden is increasingly shouldered by less costly homes and apartments. The City of Vancouver council, in a tone-deaf move, just voted to increase the property tax burden by 7 per cent, more than three times the rate of inflation and vastly more than most people’s average wage increase. That means less money to put in a kid’s RESP or buy groceries. Let’s remember taxes add costs to everything, housing included, passed on to renters and buyers alike.

As home values have declined by almost $90 billion in the Metro region, first reported by the homeowners’ advocacy group StepUpNow, and sales have plummeted, the Ministry of Finance was forced to decrease real estate-related revenue estimates. This means the government must either increase taxes or reduce services to maintain its financial position. Rapidly declining home values threaten the economic prosperity of all British Columbians.

How much is a $90-billion loss?

This amount is 1.5 times the B.C. budget of $58.3B and more than double the largest business investment in Canada’s history — the $40-billion LNG plant in northern B.C. Even former NDP MP and now Vancouver Mayor Kennedy Stewart cautioned about not wanting to “collapse housing values.”

Those publicly celebrating B.C.’s equity losses are disconnected politicians and a handful of left-wing academics who often enjoy the benefits of inflation-indexed, taxpayer-funded pension plans. The B.C. Public Service Pension Plan averaged a 10-year return rate of almost 10 per cent, ironically with 20 per cent of those pension investments in real estate/mortgages. The majority of people do not have these guaranteed pensions to rely on, instead using their homes to fund retirement.

Perhaps those with guaranteed taxpayer-funded pensions would accept a 15 per cent reduction on their pension asset for the greater good of taxpayers. Making existing homeowners poorer is hardly a great housing affordability strategy.

Although much of the public discourse has been resentful of homeowners who were fortunate to have bought a home 40 years ago, a B.C. Real Estate Association analysis confirms the average Metro Vancouver housing appreciation rate for that time period was about 3.7 per cent annually, after inflation. Costly home repairs such as roofs, double-digit 1980s interest rates, or replacing sewer lines aren’t included. Both Canadian and U.S. stock markets far exceeded 3.7 per cent annually after inflation over the past several decades.

The divisiveness of housing politics in our society is not helpful. Pitting renters against homeowners is a dirty tactic that polarizes an already stressed population. Shaming those who have worked hard to secure a home for their families, regardless of whether they’re renters or homeowners, undermines the health of our society itself.

Let’s be clear: When 26 per cent of a typical new Vancouver apartment’s cost are government taxes and fees, the solution is not more taxes.

Paul Sullivan is a partner at Burgess, Cawley, Sullivan and Associates Ltd., a commercial real estate appraisal and property tax consulting group

This article originally ran in the Vancouver Sun on January 9th, 2020.